9th Cir. Holds Judicial Foreclosures Are Debt Collection Under FDCPA

A panel of the U.S. Court of Appeals for the Ninth Circuit recently held that a law firm’s effort to collect homeowner association (“HOA”) assessments through judicial foreclosure constitutes debt collection under the federal Fair Debt Collection Practices Act.

In so ruling, for purposes of whether activity constitutes debt collection under the FDCPA, the Court distinguished judicial foreclosures that allow for deficiency judgments from non-judicial foreclosures that do not allow for deficiency judgments.

A copy of the opinion in McNair v. Maxwell & Morgan, PC is available at: Link to Opinion.

The plaintiff consumer purchased the subject property in Arizona subject to annual HOA assessments pursuant to a declaration of covenants, conditions, and restrictions.

The assessments were payable in monthly installments. Upon default on payment of the assessments, the HOA had the right to collect the debt, as well as late fees, costs, and attorneys’ fees, by suing the plaintiff or bringing an action to foreclose the lien. The HOA was required to make a written demand prior to recording a notice of lien against the plaintiff’s property.

The HOA first notified the plaintiff of her failure to pay the assessment debt in 2009. The defendant law firm represented the HOA in a suit against the plaintiff in state court that was resolved with a payment agreement. After default under the agreement, the defendant revived the suit and obtained a default judgment in 2010. In 2012, the defendant represented the HOA in another suit in state court against the plaintiff after a subsequent default. The second suit was resolved pursuant to a new payment plan and the plaintiff executed a stipulated judgment recognizing the HOA’s right to collect the debt by selling the subject property.

In 2013, the plaintiff defaulted under the new payment plan and the defendant requested, via praecipe and writ of special execution for the foreclosure of the subject property. The state court granted the defendant’s request and the property was sold for $75,000 at a foreclosure sale. The defendant and the HOA received $11,600.12 in satisfaction of the debt, attorneys’ fees, and costs.

The plaintiff filed suit in federal court alleging the defendant violated the FDCPA in 2013 and 2014 by misrepresenting the amount of the plaintiff’s debt and seeking attorneys’ fees to which it was not entitled.

The trial court granted the defendant’s motion for summary judgment as to the FDCPA claim on two independent grounds. First, the trial court found that the defendant was not engaged in debt collection as defined under the FDCPA. Second, the trial court found that filing the writ did not violate the FDCPA because the state trial court later approved the attorneys’ fees claimed in the writ. The plaintiff appealed.

On appeal, the Ninth Circuit ruled that the trial court erred in holding that the judicial foreclosure proceedings were not debt collection for purposes of the FDCPA.

The Court noted that the FDCPA defines a “debt” as “‘any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes, whether or not such obligation has been reduced to judgment.’” See 15 U.S.C. § 1692a(5). Further, the Court explained that the FDCPA “defin[es] the term ‘debt collector’ to embrace anyone who ‘regularly collects or attempts to collect . . . debts owed or due . . . another.’” Henson v. Santander Consumer USA Inc., 137 S. Ct. 1718, 1721 (2017) (citing 15 U.S.C. § 1692a(6)).

The Ninth Circuit noted that “’attorneys who “regularly” engage in consumer-debt-collection activity’ are debt collectors under the Act, ‘even when that activity consists of litigation.’” Heintz v. Jenkins, 514 U.S. 291, 299 (1995). Further, the plaintiff’s obligation to pay HOA dues arose “out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes[.]” Thus, the Court explained that the record was clear that the defendant was a “debt collector” collecting “debt” under the plain language of the FDCPA.

In so ruling, the Court rejected the defendant’s contention that they are not debt collectors when pursuing a foreclosure to enforce a security interest under Ho v. ReconTrust Co., NA, 858 F.3d 568 (9th Cir.), cert. denied, 138 S. Ct. 504 (2017). In Ho, the Court held that “actions taken to facilitate a non-judicial foreclosure . . . are not attempts to collect a ‘debt’ as that term is defined by the FDCPA[,]” because “[t]he object of a non-judicial foreclosure is to retake and resell the security, not to collect money from the borrower[,]” and because “California law does not allow for a deficiency judgment following non-judicial foreclosure[,]” “the foreclosure extinguishes the entire debt even if it results in a recovery of less than the amount of the debt.”

The Ninth Circuit explained that Ho was distinguishable, because here, the defendants “filed the Praecipe and Writ in order to collect a debt arising from Plaintiff’s failure to pay homeowner association fees as part of a judicial foreclosure scheme that in many cases allows for deficiency judgments.” See Ariz. Rev. Stat. §§ 33-727(A), 33-729(B)-(C). Thus, the defendant’s actions in the judicial foreclosure constituted debt collection under the FDCPA.

The Court also rejected the trial court’s finding that the writ did not violate the FDCPA because the state trial court later approved the attorneys’ fees claimed therein. Specifically, the Court found that the trial court failed to examine whether the defendants were legally entitled to claim the attorneys’ fees owed at the time of the writ application.

Under the FDCPA, debt collectors “may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt[,]” which includes “[t]he false representation of the character, amount, or legal status of any debt[.]” See 15 U.S.C. § 1692e. The Court noted that the defendant stated in the writ that accruing post-judgment attorneys’ fees were due pursuant to the stipulated judgment. However, in Arizona, requests for post-judgment attorneys’ fees must be made in a motion to the court. See Ariz. R. Civ. P. 54(g).

The Ninth Circuit found that no state court had approved the “accruing” attorneys’ fees claimed in the writ at the time it was filed, and therefore, the defendant violated the FDCPA by “falsely represented the legal status of this debt, by implicitly claiming that the accruing attorneys’ fees of $1,597.50 already had been approved by a court.”

Accordingly, the Court reversed the trial court’s granting of summary judgment in part and remanded the case for a determination on damages for the FDCPA claim.

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Stuart Miles is based in Maurice Wutscher's Chicago office and practices in the firm's Consumer Credit Litigation and Commercial Litigation groups. Before joining Maurice Wutscher, Stuart served as an Assistant Corporation Counsel with the City of Chicago’s Department of Law, where he earned the Chicago Landmark Award for Preservation Excellency from the City of Chicago Office of the Mayor and a Problem Solving Award from the Chicago Police Department. As a member of the City’s Drug and Gang House Enforcement division, he successfully conducted hundreds of trials and evidentiary hearings, including concerning criminal activity at residential buildings and at various nightclubs. He has also worked as a criminal defense and civil rights attorney. Stuart holds a Bachelor of the Arts degree in Political Science from the University of North Carolina – Chapel Hill. He earned his Juris Doctorate graduating cum laude from The John Marshall Law School in Chicago. While in law school, Stuart completed a judicial externship in the Mortgage Foreclosure Section of the Circuit Court of Cook County.